In this podcast Consultant, Robert Lindsay discusses what a life estate is and why they are created as well as what right of residency means.
Annie: “Welcome, today I’m in the studio with Robert Lindsay from Mullane and Lindsay Solicitors, Newcastle, and Tea Gardens. Hi Robert and welcome to the studio, thanks for joining me”
Robert: “Good morning, Annie.”
Annie: “Our topic of discussion for this interview, is life estates and rights of residents, can you elaborate on that, Robert?”
Robert: “Well, I can. Life estates and rights of residents are becoming useful tools for estate planning.”
Annie: “Robert, what is a life estate in a property?”
Robert: “A life estate is a right to use a property in accordance with the terms and conditions of the grant of the life estate for the period of the life of the recipient of the life estate. I know that’s wordy but that’s the person who has the benefit of the life estate, can either live in the property or he/she can rent the property or use it in some other way. They don’t own the property, they just have a right.”
Annie: “So, what is a right of residency?”
Robert: “Well, its similar and there’s an overlap between life estates and rights of residency on occasion. A right of residency exists where an individual has a right to live in a property subject to terms and conditions determined by the person who gives the right of residency, and they can live in the property for life or a shorter period of time.”
Annie: “Why are life estates or life of residents created?”
Robert: “Well, this is where you get down to the nitty gritty. I’ll start with the rights of residency, they’re usually created as a part of estate planning. We live in a land of blended families now and often a couple will own a property, live happily in the property, owned jointly. Ultimately when the second of them dies, they want their interest in the property to pass to their children. So, the husband might have two children from the previous marriage, the wife might have a couple. They have an obligation to provide for each other and they want to provide for each other but when the second of them dies, they want their interest in the property to pass to their children, so often a right of residency is often created under the will of each of the husband and wife, so when the first one dies, the property can be occupied by the surviving spouse and then when he/she dies, the property can be sold and the interest of each husband or wife can be passed to each of their children, thereby achieving the result. However, life estates are different, or they can be different, and they are usually created to enable an asset in an estate to be used by an individual whether as their home or other purposes. For example, a life estate might be left in a property to an individual and he/she already has a home and has no interest in living in the property for which they’ve received in the life estate, they can rent the property and comply with the terms and conditions and continue to do so until the day they die. Often times this tool is used by people when preparing or doing their estate planning and some will say its ruling from the grave but its to protect individuals from themselves. A couple may have a son who is as soon as he receives a house, under the terms of a will, will sell it and spend the money, they don’t see it that way so they create a life estate in the property, whereby he can live in the property or collect the rents and spend them as he wishes but then when he dies, the house passes on to other beneficiaries, like his children or perhaps other people and that’s why sometimes a life estate is chosen over a right of residency. So, sometimes its to protect beneficiaries from themselves or to protect the family’s wealth of future generations.”
Annie: “So, what happens if the beneficiary can no longer live in the property?”
Robert: “Well, that really depends on the terms and conditions attaching to the right of residency, or the life estate. So, the simple one first, the life estate, usually nothing because a life estate as I’ve said isn’t usually just for a right of residency it can be used for to generate income from the property, whereas a right of residency, obviously, the person or recipient of the right of residency ceases to life in the property then it comes to an end because the property falls vacant and the property will then pass to the residual beneficiaries or whoever under the document under the right of residency would ultimately receive the right of the property. Having said that, it often is a condition that if a person who receives a right of residency abandons the property it comes to an end in any event.”
Annie: “Are there risks associated with life estates or rights of residency?”
Robert: “Well, there’s always risks because we can’t predict the future. It often swings on what the conditions are that we’re attaching to the right of residency or the life estate. Its usual that the recipient of the life estate or the right of residency, it’s a condition that they pay the council rates, water rates, any other tax attaching to the property such as land tax, their obliged to keep it insured, their obliged to maintain the property. On occasions, arguments arise to whether the property is being adequately maintained, so it goes without saying that if the right of residency is created or a life estate, that an inspection take place at that time, so its triggered and minimises any disputes. There are other problems as well, that might arise. Sometimes people just live too long, for an example a right of residency might exist in respect of the person who is only 50 or 60 when the owner of the property dies, and they might go on to live longer and go on till their 95, the residual beneficiaries make it difficult for that person because they want the property. Another sleeper is capital gains tax, the tax office treats a right of residency as an asset and if the recipient of the right of residency or the life estate relinquishes that before it would normally come to an end, then they are disposing of an asset and there can be capital gains tax as a consequence. So, it’s very important to get advice before you hand back a right of residency and for that matter if you intend to create a right of residency in your Will or a life estate in your Will, proper advice should be obtained because there can be implications which will cost money in the long run.”
Annie: “Well thank you for your advice today, very informative. Thank you to Mullane and Lindsay, Newcastle and Tea Gardens.”
